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In?line; EV 2Ws ramp?up in focus ahead  

Valuation and View? Market share gains to persist  

TVSL 2QFY23 were largely in?line however margins delivery of 10.2% (+20bp QoQ and YoY) were ~50bp lowerthan our estimates of 10.7%. This was led by higher than expected other expense at Rs6.4b (est Rs5.9b) led by new product launches, higher marketing spends and increase in variable expense linked with volume increase. Going ahead, QoQ margins expansion is likely led by softening in RM prices, further price hikes of ~1% in domestic markets and cost control. Going forward, management re?iterated EV launches (in 5?25kwh capacity, both in 2W and 3W segments). We continue to believe TVSL is better placed among 2W OEMs both in ICE and EV product segments led by better product acceptability which should drive further market share gains. TVSL hinted iQube production will be ramped up to 10k/month during 3QFY23 and further to 25k/month progressively MoM, indicating strong demand pool for the product.

In our view, while EBITDA margins expansion of 20bp QoQ is tepid v/s BJAUT (+100bp QoQ at 17.2%) and HMCL (+20bp at 11.4%), we believe its still considered resilient given upfronting of cost on EVs/digital/connected technologies. TVSL currently trades at 26.5x of 24 EPS (v/s HMCL at 12.3x and BJAUT of 15.2x). We believe, it should continue to trade at a premium as we expect EPS CAGR of ~25% over FY23?25E. We believe sustained market share gains in domestic EV 2Ws led by aggressive product pipeline, scope of external investments in to EV vertical and NBFC TVS credit are additional re?rating triggers. We re?iterate TVS as our preferred pick among 2Ws with ADD and revised TP of Rs1,256 (v/s Rs1,160) as we roll forward our TP to Sep?23 and continue to maintain co at 26x Sep?23 EPS plus Rs55 value to TVS credit and introduce FY25 estimates.

Result Highlights – Upfronting of cost restricted margins expansion

* Revenues grew 20.1% QoQ at Rs72.2b (in?line) led by volume growth of 13.3% QoQ at 1.03m units while realization grew at record Rs70.3k/unit (est Rs68k/unit) led by price hikes, favorable mix and higher spare sales.

* Gross margins came in lower at 23.8% (flat QoQ/ est 24.3%) impacted largely by RM inflation. However, management indicated RM decline from Sep’22 to benefit margins in 2HFY23. TVSL has taken further price hikes of ~1.1% in Ocr’22 in domestic market followed by ~1% price hike in domestic and exports in 2QFY23.

* EBITDA grew 22.9% QoQ at Rs7.4b (in?line) with margins at 10.2% (+20bp QoQ, est 10.7%), impacted by higher other expense. TVSL’s EBITDA/unit came in record at Rs7.2k/unit (+16.7% Yo/ +8.5% QoQ).  

* Led by better operating performance, adj.PAT grew 27% QoQ at record Rs4.1b.

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